Nov. 24th, 2002

05:03 pm - So you wanna be a money manager?

Marketocracy has a unique way of selecting fund managers for MOFQX--in brief, we run a "farm system" for mutual fund managers. Think you can invest better than the pro's? Here's your chance to prove it:

1. You create an account at our website, marketocracy.com.2. We give you $1 million in play money. 3. You create a mutual fund portfolio by buying stocks on our simulated stock market exchange.4. If your fund becomes one of the top 100 funds on our site, you become part of the "m100".5. The holdings and trades of the real-money fund MOFQX mirror the holdings and trades of the m100. As compensation for their services, we pay each of the m100 members 0.3 basis points. Eventually, we also plan to hire a few our top managers to manage their own funds.

Here are the details:

We try to make the simulation as realistic as possible. You can buy most stocks that trade on the major U.S. exchanges (Nasdaq, AMEX, NYSE), and your trades are filled in proportion to the real trading volume (currently, we fill trades at a 1:10 ratio to the real market volume). You are charged virtual trading fees, and SEC fees, although you're not charged any taxes.

Mutual funds make money by charging an annual fee that's a percentage of the assets they have under management. A basis point is 1/100th of a percent. Currently, the industry average management fee is 145 basis points (1.45%). Our management fee is higher at 1.95%. Of that 1.95%, 0.30% (30 basis points) is split equally among the m100. As we get more people with longer track records, we plan to introduce other kinds of funds, such as sector funds, or funds that are allowed to go short.

How has MOFQX done? MOFQX beat the S&P500 by about 8% since inception. Over the long term (10+ years), less than 20% of actively managed mutual funds beat the S&P500. Moreover, MOFQX beat the S&P500 with a portfolio containing more than 700 stocks, none of which made up more than 2% of the funds assets. So MOFQX had about half the volatility of the S&P500. Currently, the fund holds about 1000 positions.

Of course, MOFQX's performance could fail to continue to beat the S&P500 over the coming years--one year is not a very long time. And the evidence that actively managed funds can consistently beat the S&P500 over the long term is not encouraging. However, if investment skill exists, I don't know of better way to find it or take advantage of it than what Marketocracy is doing.

Here's a graph of MOFQX's performance over the past year, compared to the S&P500:

The one problem I can see is that there is a lot of upside for a risk taking fund manager but no downside. He is not putting his own money in and he can simply shrug if he loses. Of course, this could apply to any fund manager with little personal stake in the fund.It is an ingenious scheme for recruiting talent - very 'cluetrain'.

Yes, that is a risk. However, there are several factors that attenuate it. First, each m100 member only influences 1/100th of the fund's assets. So even if one member's performance drops dramatically it doesn't affect the fund overall that much. Second, the m100 group is re-evaluated monthly. Continued ranking in the m100 depends on continued stellar performance. Third, keep in mind that m100 members are paid based on the fund's assets. Although the amount Marketocracy can pay them now is nominal (due to the small size of the fund), as the fund gets bigger, this amount will increase. For example, there are over 40 mutual funds with assets over $10 billion. At $10 billion in assets 0.3 basis points is worth $300 K/year. This represents a fairly large opportunity cost, if a member makes a risky gamble and loses.

I just have to say that this is a really cool idea; it's almost like a neural network of humans. I'll have to give it a try, even if just out of curiosity -- it's one of the more interesting ideas I've heard of late.

6% drop in one day!

MOFQX had a dividend distribution today. Which means that for every share of MOFQX, fund shareholders got $0.89787. Most people who own the fund will have automatic reinvestment set up, so tonight while the share price is lower, they have more shares. We were actually down 0.452% today.